If you’re going to make money in the stock market, you cannot just follow the crowd.
That’s one rule every investor should learn early on.
I mean, many market newcomers think the way to riches is to get on board with “the next hot share”.
Well, I know I did when I first started investing.
But now a bit older and a bit wiser, I know that…
Hot stocks and hot sectors more often than not turn out to be full of hot air!
In fact, I’ve always found I need to be willing to go against the grain to be a successful investor.
Let me explain why – and I’ll tell you exactly how I’m using this strategy to find the shares that could be the bargains of 2014!
“Baaaaaaaaaaa!”
Here’s the problem with gambling on ‘the latest hot penny share’:
You come across that little blue-sky stock everyone’s talking about… the one that’s already soared 200%… and you also like the sound of the story.
That smart bloke on the bulletin board called it a “no brainer”
…while a work colleague thinks it’s worth a punt…
…and his mate in the City says news is right around the corner… and his dog also owns a few in his SIPP.
They’re not bothered about what the company is really worth, or what profits the underlying business could make in the years to come.
Instead, they’re too busy hoping the sexy story attracts someone else to push the price up further to give them a quick profit.
And if everybody holding the stock is only in it to make a quick quid, they’ll all be off at the first hint of a sell-off…
…to leave me, you and every other ‘unlucky’ private investor holding the baby at the top.
So I say that if you want to avoid losing your shirt, you cannot afford to be a sheep and blindly follow the crowd.
And I would describe relying on a “greater fool” to come along to inflate overpriced, ramped-up stocks to new heights is gambling, not investing.
So what’s the alternative?
Don’t get me wrong Fools.
I’m not saying you should do the opposite of what the crowd is doing just for the sake of it.
But smart investors don’t let the crowd’s fear and greed affect their decisions.
Instead, they take advantage of opportunities the market has missed. In particular, they look for ideas the market HATES and where other investors have panicked and bolted!
You see, successful investors make up their own minds based on what they think a company is worth paying for, and focus on what they’re receiving for their hard-earned money.
The decisions might not seem popular at the time, but that’s what can make an opportunity a real bargain. All it takes is sensible judgment, patience, and the courage to be independent.
Retail De-Railed
With the stock market gleaming after another year of bull-run returns, I’m going to tell you about a very beaten-up sector.
And brace yourselves; it won’t be ‘popular’!
That sector is traditional, bricks and mortar retail.
Yes, you’ll have no doubt read headlines such as The High Street is Dead, and there’s plenty of gloom in the mainstream media after some disappointing Christmas sales results.
But I think the rumours of Retail’s death have been greatly exaggerated.
And I believe smart investors should look closer at cheap, recovering names on the high street with big recovery potential.
It was one of the least popular investment decisions I’ve ever made
In 2013, I stuck my neck out and significantly increased my holding of one beaten-up high-street retailer – Britain’s biggest bakery chain Greggs.
It was one of the least popular investment decisions I’ve ever made, and even caused a few sniggers in the Fool office.
But all it took was a modest trading statement to send the shares flying 10% higher one day last week. And with the shares up 27% from their 2013 low, I think the turnaround story is just getting started.
Love him or hate him, he is a retail genius
You’d be hard pushed to find anyone who still liked Debenhams (apart from the Motley Fool!) after its Christmas trading update.
That is, until Mike Ashley-backed Sports Direct took a 4.6% stake!
I don’t know about you, Fools. But love him or hate him, Mr Ashley is a ruthless and effective retail genius. I wouldn’t bet against his judgment!
But perhaps my favourite ideas in the sector are William Morrison Supermarkets and Tesco. I think they’re superb defensive businesses, yielding 5% on average between them – and the market hates them both in 2014!
So be brave, hold your nerve and look to go against the grain, courageous Fools!
